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410 CHAPTER 10 INVENTORY MODELS

Figure 10.1 Inventory for Cape Cola

Maximum Inventory
Q

Inventory 1 /2Q Average

Inventory

0 T
Length of time required to
deplete an inventory of Q units
Time

Figure 10.2 Inventory Pattern for the EOQ Inventory Model

Inventory is used at the constant
demand rate

Inventory Q

1 /2Q Average
Inventory

0 Time

The holding cost can be calculated using the average inventory. That is, we can
calculate the holding cost by multiplying the average inventory by the cost of
carrying one unit in inventory for the stated period. The period selected for the
model is up to you; it could be one week, one month, one year or more. However,
because the holding cost for many industries and businesses is expressed as an
annual percentage, most inventory models are developed on an annual cost basis.
Let:
I ¼ annual holding cost rate
C ¼ unit cost of the inventory item
C h ¼ annual cost of holding one unit in inventory

The annual cost of holding one unit in inventory is:

C h ¼ IC (10:1)

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